Break for Life Insurers in Policy Sales

By MICHAEL QUINT

Published: September 11, 1995

A committee of insurance regulators recommended on Saturday new rules for selling life insurance that are much less stringent than regulators' proposals of a year ago. As such, the proposals are much more to the liking of the life insurance industry.

The proposed rules concern the use of sales material, known as "illustrations," which use columns of numbers to describe the investment performance of some policies, and to show how the investment can grow, or be withdrawn, or used to buy an increased death benefit.

Life insurance companies are facing a mountain of lawsuits and customer complaints because the investment performance of their policies has not been as good as was described when the policies were sold. New York Life, for example, recently agreed to settle claims about misleading sales practices and about lower-than-projected investment returns. The cost of settling was $65 million.

The rules proposed this weekend by a group of state regulators are intended to stop the use of unrealistic illustrations and to state more clearly that the illustrations are just examples of how a policy might perform.

The new rules could take effect in 1997 if they are adopted by the full life insurance committee of state regulators on Tuesday and then by the full membership of the National Association of Insurance Commissioners, an organization of state regulators, in December. If the associaton accepts the rules as a model, it is up to each state to adopt them.

One of the most debated of the new rules allows companies to use illustrations showing investment returns in future years equal to those the company currently pays. That is much more lenient than the proposal by regulators last year that would forbid illustrations of any investment returns except those guaranteed by insurers, typically 3 or 4 percent. Companies routinely pay several percentage points more than the minimum, but the amount varies depending on the company's earnings and other factors.

When illustrations were studied last year, David J. Lyons, then the insurance commissioner in Iowa, noted that projecting the current investment return into the future leaves customers open to disappointment if investment returns decline. That is exactly what has occurred in recent years, he said, noting that illustrations used to sell new policies in the mid-1980's projected the continuation of double-digit investment returns. Instead, investment returns fell to 6 or 7 percent as interest rates declined.

John K. Booth, chief actuary of the American Council of Life Insurers, a trade group representing life insurance companies, said "we are on the whole, supportive" of the new proposal. He said insurers would seek a three-month delay in the approval by the full association of commissioners, to study the proposals. He added that some companies worry that the rules could stop arrangements where companies promise bonuses to customers who keep their policy a specified number of years.

One common sales tactic that would be banned by the rules is the promise of a "vanishing premium" based on the idea that investment returns eventually accumulate to a level where they can pay for premiums. When interest rates and policy investment returns were over 10 percent in the mid-1980's, many insurers and agents told cusotmers that premiums would vanish, or be paid out of investment earnings rather than directly by the customer, in six or seven years. But when interest rates and investment returns declined, consumers found they needed to continue paying premiums with cash for many more years than they had expected.

Some of the new rules are aimed specifically at agents, who have become increasingly skilled at using personal computers to produce their own sales illustrations that might vary from those prepared by their home office. One rule, for example, would not let agents use illustrations showing performance more favorable than company-prepared illustrations.

Another rule would require actuaries to attest that the company is using reasonable assumptions in its illustrations about its expenses and costs of paying death benefits. On occasion, both have been overly optimistic, making policies more attractive.